NMSA 55-2A-504. Liquidation of damages

55-2A-504. Liquidation of damages. (1) Damages payable by either party for default, or any other act or omission, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to lessor's residual interest, may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission. (2) If the lease agreement provides for liquidation of damages, and such provision does not comply with Subsection (1), or such provision is an exclusive or limited remedy that circumstances cause to fail of its essential purpose, remedy may be had as provided in this article. (3) If the lessor justifiably withholds or stops delivery of goods because of the lessee's default or insolvency (Section 55-2A-525 or 55-2A-526 NMSA 1978), the lessee is entitled to restitution of any amount by which the sum of his payments exceeds: (a) the amount to which the lessor is entitled by virtue of terms liquidating the lessor's damages in accordance with Subsection (1); or (b) in the absence of those terms, twenty percent of the then present value of the total rent the lessee was obligated to pay for the balance of the lease term, or, in the case of a consumer lease, the lesser of such amount or five hundred dollars ($500). (4) A lessee's right to restitution under Subsection (3) is subject to offset to the extent the lessor establishes: (a) a right to recover damages under the provisions of this article other than Subsection (1); and (b) the amount or value of any benefits received by the lessee directly or indirectly by reason of the lease contract. History: 1978 Comp., § 55-2A-504, enacted by Laws 1992, ch. 114, § 59. OFFICIAL COMMENTS UCC Official Comments © by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved. Uniform Statutory Source: — Sections 2-718(1), (2), (3) and 2-719(2) [55-2-718 and 55-2-719 NMSA 1978, respectively]. Changes: — Substantially rewritten. Purposes: — Many leasing transactions are predicated on the parties' ability to agree to an appropriate amount of damages or formula for damages in the event of default or other act or omission. The rule with respect to sales of goods (Section 2-718) [55-2-718 NMSA 1978] may not be sufficiently flexible to accommodate this practice. Thus, consistent with the common law emphasis upon freedom to contract with respect to bailments for hire, this section has created a revised rule that allows greater flexibility with respect to leases of goods. Subsection (1), a significantly modified version of the provisions of Section 2-718(1) [55- 2-718 NMSA 1978], provides for liquidation of damages in the lease agreement at an amount or by a formula. Section 2-718(1) [55-2-718 NMSA 1978] does not by its express terms include liquidation by a formula; this change was compelled by modern leasing practice. Subsection (1), in a further expansion of Section 2-718(1) [55-2-718 NMSA 1978], provides for liquidation of damages for default as well as any other act or omission. A liquidated damages formula that is common in leasing practice provides that the sum of lease payments past due, accelerated future lease payments, and the lessor’s estimated residual interest, less the net proceeds of disposition (whether by sale or re- lease) of the leased goods is the lessor’s damages. Tax indemnities, costs, interest and attorney’s fees are also added to determine the lessor’s damages. Another common liquidated damages formula utilizes a periodic depreciation allocation as a credit to the aforesaid amount in mitigation of a lessor’s damages. A third formula provides for a fixed number of periodic payments as a means of liquidating damages. Stipulated loss or stipulated damage schedules are also common. Whether these formulae are enforceable will be determined in the context of each case by applying a standard of reasonableness in light of the harm anticipated when the formula was agreed to. Whether the inclusion of these formulae will affect the classification of the transaction as a lease or a security interest is to be determined by the facts of each case. Section 1- 203 [55-1-203 NMSA 1978]. E.g., In re Noack, 44 Bankr. 172, 174-75 (Bankr.E.D.Wis.1984). This section does not incorporate two other tests that under sales law determine enforceability of liquidated damages, i.e., difficulties of proof of loss and inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. The ability to liquidate damages is critical to modern leasing practice; given the parties' freedom to contract at common law, the policy behind retaining these two additional requirements here was thought to be outweighed. Further, given the expansion of subsection (1) to enable the parties to liquidate the amount payable with respect to an indemnity for loss or diminution of anticipated tax benefits resulted in another change: the last sentence of Section 2-718(1) [55-2-718 NMSA 1978], providing that a term fixing unreasonably large liquidated damages is void as a penalty, was also not incorporated. The impact of local, state and federal tax laws on a leasing transaction can result in an amount payable with respect to the tax indemnity many times greater than the original purchase price of the goods. By deleting the reference to unreasonably large liquidated damages the parties are free to negotiate a formula, restrained by the rule of reasonableness in this section. These changes should invite the parties to liquidate damages. Peters, Remedies for Breach of Contracts Relating to the Sale of Goods Under the Uniform Commercial Code: A Roadmap for Article Two, 73 Yale L.J. 199, 278 (1963). Subsection (2), a revised version of Section 2-719(2) [55-2-719 NMSA 1978], provides that if the liquidated damages provision is not enforceable or fails of its essential purpose, remedy may be had as provided in this Article. Subsection (3)(b) of this section differs from Subsection (2)(b) of Section 2-718 [55-2- 718 NMSA 1978]; in the absence of a valid liquidated damages amount or formula the lessor is permitted to retain 20 percent of the present value of the total rent payable under the lease. The alternative limitation of $500 contained in Section 2-718 [55-2-718 NMSA 1978] is deleted as unrealistically low with respect to a lease other than a consumer lease. Cross References: — Sections 1-201(37), 2-718, 2-718(1), 2-718(2)(b) and 2-719(2) [55-1-201, 55-2-718 and 55-2-719 NMSA 1978, respectively]. "Consumer lease". Section 2A-103(1)(e) [55-2A-103 NMSA 1978]. "Delivery". Section 1-201(14) [55-1-201 NMSA 1978]. "Goods". Section 2A-103(1)(h) [55-2A-103 NMSA 1978]. "Insolvent". Section 1-201(23) [55-1-201 NMSA 1978]. "Lease agreement". Section 2A-103(1)(k) [55-2A-103 NMSA 1978]. "Lease contract". Section 2A-103(1)(l) [55-2A-103 NMSA 1978]. "Lessee". Section 2A-103(1)(n) [55-2A-103 NMSA 1978]. "Lessor". Section 2A-103(1)(p) [55-2A-103 NMSA 1978]. "Lessor's residual interest". Section 2A-103(1)(q) [55-2A-103 NMSA 1978]. "Party". Section 1-201(29) [55-1-201 NMSA 1978]. "Present value". Section 2A-103(1)(u) [55-2A-103 NMSA 1978]. "Remedy". Section 1-201(34) [55-1-201 NMSA 1978]. "Rights". Section 1-201(36) [55-1-201 NMSA 1978]. "Term". Section 1-201(42) [55-1-201 NMSA 1978]. "Value". Section 1-201(44) [55-1-201 NMSA 1978].